Tuesday, October 04, 2011

Magical Thinking

This is what policy paralysis looks like. From the FT's ongoing coverage of the eurozone crisis:

8.40: Another day, another fudge. Or so cynics might think following the latest eurozone finance ministers’ decision on Greece. After meeting until late into the night, ministers from the 17-member common currency area agreed to – yup you guessed it – wait a bit longer before deciding what to do.

Sometimes bad policy-making takes the form of enacting bad policies. But sometimes it takes the form of doing nothing.

What do the EU's finance ministers think will be different one month from now? Do they expect that between now and then Greece will find a secret treasure chest that will enable the Greeks to miraculously reduce their budget deficit? Or that investors will just get bored of the whole eurozone debt crisis, go on a nice holiday for the rest of the year, and stop applying pressure to fix anything?

I realize that this will probably sound like a truly horrible insult (particularly to European policy-makers themselves) but I can't help but be reminded of the magical thinking that characterized so much of George W. Bush's policy-making, who regularly avoided making difficult policy choices due to the apparent belief that things would just get better on their own. It seems that many European policy-makers are hoping for such a similar magical resolution to the eurozone debt crisis.

Either that, or it's nothing more than simple procrastination.

UPDATE: Oops, I hadn't remembered that Paul Krugman had used the term magical thinking in the context of European policy-making more than a year ago. Sorry for missing the citation, Paul.

5 comments:

Of course they procrastinate. Whichever way this ends (more liquidity, writeoff, collapse...) will result in the EuroZone core shelling out a lot of money - mostly to their own banks. No politician wants to actively make a decision that will precipitate this, even if this is where all roads lead. So they play for time, waiting until "their hand is forced by events". They will still be eviscerated by their electorates, but just not quite as badly as if they took an "active" role.

This is a structural inevitablility with a common currency (wealth transfer from richer to poorer areas), and it was hubristic of teh EZ to believe they could ignore it. Much of the market also believed it as well. As did almost all economists. Those that didn't were labelled pariahs and Jonah's by the rest.

Will we learn from this? History suggests not. We generally do not learn economic mistakes, just repeat them on a cycle every few decades.

Bob M><span>But the problem is more political than anything -- as you suggested, if I read you correctly -- and politics moves according to its own imperatives. </span>

The problem is cascading failure in the banking sector once banks stop lending to each other to save their capital. The solution is politcal, bad loans have to marked down in an orderly way. The non-solution is to wait until the loans are marked down in a non-orderly way.

Lets assume that the problem is more about the European banks, who will default when Greece or another European country defaults. In that case I think the politicians can only wait and pray until the banks have enough capital to survive that default.

All other decisions will trigger just what they want to avoid, bankruns and banks that need billions from the governments to save their asses.

<p><span>The Europeans are missing the problem.<span> </span>The underlying problem is the imbalance in trade.<span> </span>That’s where all the money went, and why the Greeks don’t have it now, and why the Greek economy is now a shambles.<span> </span>That is the continuing reason the situation keeps worsening.<span> </span>And why the Europeans have no real solution, and no timetable for the problem's resolution.</span></p><p><span><span> </span></span></p><p><span>To solve the trade imbalance, they should phase in Warren Buffet’s idea of import certificates:<span> </span>For each euro of goods exported from Greece, the Greek government would give a certificate allowing one euro of goods to be imported.<span> </span>Warren proposed giving it to the exporter. In: </span><span>http://anamecon.blogspot.com/2011/10/import-trade-certificates-some-problems.html</span></p><p><span>it is argued it should instead go to the government of the country of destination of the export. </span></p><p><span><span> </span></span></p><p><span>It is also described how import certificates could be phased in with a definite schedule,<span> </span>and thus provide a horizon to the European debt problem, and a describe a limit to its size.<span> </span>It also describes how Greece can eventually begin paying off (some of, they’ll never be able to pay it all) its debt.</span></p><p><span><span> </span></span><span>The Greek economy has to grow.<span> </span>Austerity will cause it to contract, and may even aggravate the trade imbalance, thus worsening the debt problem.</span></p>

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The Street Light is written by economist Kash Mansori, who works as an economic consultant (though views expressed here are entirely his own), writes whenever he can in his spare time, and teaches a bit here and there. You can contact him by writing to the gmail account streetlightblog. (More about Kash.)